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Why Isn’t There a European Silicon Valley?

· July 31, 2012

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The Economist recently published a good article on Europe’s entrepreneurship crisis, which has exacerbated the economic crisis by hindering economic growth and recovery.  The article points to three major problems that hinder European start-ups:

  1. Bankruptcy Law – Unlike the U.S., where it is relatively easy to get back on your feet after a failed business venture, the legal code of most European countries is far less forgiving.  Where in America it usually takes less than a year to discharge your debt, it averages 2 years in Spain, 6 years in Germany and 9 years in France (there is also more of cultural stigma attached to bankruptcy that can stain a person’s reputation even longer).  Several studies show that more forgiving bankruptcy laws (i.e. that allow failed entrepreneurs to bounce back quickly) are more conducive to high rates of startups and small business ownership [See: 1, 2, and 3].   In fact, some of America’s most successful entrepreneurs survived bankruptcy before hitting it big, including Henry Ford, Walt Disney, H.J. Heinz and P.T. Barnum.

As another Economist article from 1997 noted:

If you start a company in London or Paris and go bust, you have just ruined your future; do it in Silicon Valley and you have simply completed your entrepreneurial training.

  1. Early Stage Finance: Although angel funding is increasing in Europe, the second stage funding (€1.5 million – €4 million) is in short supply, as institutional investors are less willing to invest in startups.  Furthermore, VCs feel more comfortable investing closer to home (especially early stage VCs), so foreign money does not fully make up the difference of a jittery domestic investor class.

  1. Labor Law:  Startups need flexibility in hiring and firing, especially in the early stages of an operation. European laws make this extremely difficult.  Large guaranteed severances make firing current workers difficult–and the people who have worked the longest are often the most expensive to fire–and make hiring new workers more expensive (this phenomenon has also led to the massive youth unemployment in Europe). The Economist paraphrased one European executive discussing the problem with European labor law:

If young firms are to survive near-terminal mistakes, or fluctuating demand, they need to be able to reduce staff costs quickly and cheaply when necessary. That is far harder in many European countries than elsewhere. The complexity and cost of firing people in Europe is a big concern for American venture capital, says Georges Karam, the chief executive of Sequans Communications, a French chipmaker for smartphones which went public on the New York Stock Exchange last year. A fund in Boston recently pulled its investment in a start-up which its French founder had intended to begin in America but then had to bring back to France for family reasons.

However, not all is lost.  European markets are perhaps more ripe for disruption than America–that is, if domestic legislatures and the EU can get their houses in order.  As one serial entrepreneur highlighted in a presentation on why startups should stay in Europe:

Mr Varsavsky pointed out that salaries for software engineers are currently 70% lower in Europe than in California. There are millions of young people looking for work. And Europe has far fewer lawyers waiting to make life difficult for young firms and lots of protected, uncompetitive sectors ripe for disruption.

Innovation

New technologies are constantly emerging that promise to change our lives for the better. These disruptive technologies give us an increase in choice, make technologies more accessible, make things more affordable, and give consumers a voice. And the pace of innovation has only quickened in recent years, as the Internet has enabled a wave of new, inter-connected devices that have benefited consumers around the world, seemingly in all aspects of their lives. Preserving an innovation-friendly market is, therefore, tantamount not only to businesses but society at large.